Are Hospitals Paying for the Medical Device Tax?

Evidence is emerging that some medical device manufacturers are shifting the burden of the newly implemented 2.3 excise tax onto hospital customers. The medical device tax is a section of the Obama administration’s Affordable Care Act (ACA) that came into effect Jan. 1.

The Wall Street Journal (WSJ) acquired letters sent from nine different device companies to hospitals. “As a result of this law, we will be forced to charge the 2.3 percent federal medical device excise tax to you,” read a letter from Cardica Inc., maker of cardiac surgical tools, the newspaper reported.

Other companies confirmed by WSJ to quietly have added new surcharges or warned hospitals of price increases include feeding-tube supplier Applied Medical Technology Inc. and respiratory-valve maker Hans Rudolph Inc.

Hospital executives confirm they are paying for the hike in taxes device companies have to pay, but device company executives remain tight lipped on the pattern this early in the game.

Industry lobbyists and advocates have said repeatedly that the tax will not “pay for itself” in the form of new customers who now can afford better healthcare, as defenders of the law suggest.

“This theory that there’s going to be a windfall [of new patients for device makers] just doesn’t hold water,” said J.C. Scott, chief lobbyist for the Advanced Medical Technology Association (AdvaMed). Organizations such as AdvaMed and the Medical Device Manufacturers Association warned there would be effects such as a decline in innovation, layoffs and offshoring. Making hospitals pay for the tax indirectly could be one more unforeseen ripple effect.

The Healthcare Supply Chain Association (HSCA) and its group purchasing organization (GPO) members expressed alarm over evidence of this shift in monetary burden to American hospitals and other healthcare providers. According to HSCA, hospitals already have committed some $155 billion over the next 10 years to help fund the ACA –and the organization said as much in a letter to the Internal Revenue Service last year.

GPOs are able to see across the health care system and detect changes in the healthcare supply chain, HSCA President Curtis Rooney explained to Orthopedic Design & Technology. “Hospitals began receiving invoices and billing notices that state that the manufacturer has added a specific line-item explicitly referencing the medical device excise tax shortly after the beginning of the new year,” he said.

“American hospitals have already lived up to their shared financial responsibility for national healthcare reform, and now face mounting budgetary strain as they continue to deliver affordable and effective patient care with fewer dollars,” Rooney said. “It is disheartening to find that some medical device companies have chosen to tack the tax right onto their invoices. We urge all manufacturers to immediately stop passing the medical device tax on to American hospitals, and ultimately to patients and taxpayers.”

Rooney noted that HSCA and its GPO members would closely monitor the situation. He also challenged hospitals to refuse to participate in contracts that clearly include surcharges meant to shift the device tax burden.

“As hospitals, long-term care facilities and other healthcare providers continue to stretch their budget dollars, they will continue to rely on their GPO partners to reduce healthcare costs and deliver the best medical products and services at the best value,” he said. “Hospitals should continue to work with their GPOs to prevent medical device manufacturers from passing along this excise tax.”

JNJ Faces First Lawsuit Over All-Metal Hips
In late January, in Los Angeles, Calif., Johnson & Johnson faced the first of approximately 10,000 lawsuits brought against it regarding the failure of its metal on metal hip implants. All-metal implants have been shown to deposit metal fragments into the bloodstream, which could possibly cause metal poisoning. JNJ unit DePuy Orthopedics Inc. pulled its ASR hip implants off the market two years ago.

Previously sealed court records show that plaintiff lawyer Brian J. Devine asked about a graph showing the company’s review of 554 implanted hips through September 2011, and how many would fail and require revision surgery. In pretrial testimony, DePuy biostatistician Paul Voorhorst said that the company internally predicted a failure rate of 37 percent within 4.6 years.

According to DePuy spokeswoman Lorie Gawreluk, the company was “looking out for patient interests by analyzing data” on the ASR hip system.

Loren Kransky brought the first suit JNJ is facing in court. He had his all-metal ASR hip implant removed due to suspected heavy-metal poisoning. During the trial, photographs were shown of his revision surgical site where metal flakes were visible. Audio from the operating room was played in which his surgeon said Kransky “might die” if the implant was not removed. The defense attorney asserted Kransky suffered from a litany of pre-existing conditions, and that he did not get worse because of the implant or better once it was removed.

According to documents filed by Kransky’s lawyers on Jan. 7, DePuy’s 2009 decision to stop selling its ASR hip implants was made by a process called “rationalization.” A memo from DePuy’s U.S. director of hip marketing Paul Berman to the company sales force read, “This global rationalization is consistent with DePuy’s strategy to streamline its portfolio, reduce cost and reallocate resources to high growth brands and technologies that best meet the current and future needs of surgeons and patients.”

DePuy “has consistently claimed it recalled the ASR for purely ‘financial reasons,’” Kransky’s lawyers wrote. DePuy then “attempted to pivot off that position, claiming the real reason it recalled the ASR was for a ‘remedial or precautionary measure.’”

Kransky’s lawyers argued that DePuy sought to deem the recall a “remedial measure” so that it could exclude certain evidence from the trial.

New Brunswick, N.J.-based Johnson & Johnson produces medical devices in a range of segments. DePuy Orthopedics is located in Warsaw, Ind.

Medtronic Kicks Off Lower Back Pain Trial
Minneapolis, Minn.-based medical mammoth Medtronic Inc. has begun the Promise trial, a prospective, randomized study of multicolumn implantable lead stimulation for predominant low back pain. This is the first large-scale study comparing the effectiveness of Medtronic’s neurostimulation therapy with Specify 5-6-5 multicolumn surgical leads plus optimal medical management (OMM) to the administration of OMM alone in patients with failed back surgery syndrome (FBSS) and predominant low back pain. It is one of four clinical studies Medtronic either has launched or reached milestones for so far this year.

“Chronic pain is a clinically challenging and often debilitating condition for which oral medications may provide insufficient relief,” noted Bart Edmiston, M.D., principal investigator for the Promise study at The Neuroscience Center in Ocean Springs, Miss., which enrolled the study’s first patient on Jan. 8.
“The Promise study will add to the growing body of evidence supporting Medtronic neurostimulation therapy, a well-established therapeutic approach, for the patients worldwide who continue to experience low back pain following back surgery.”

Estimates suggest more than 100 million U.S. adults and one in five European adults live with general chronic pain. Back pain is the most prevalent type of chronic pain, affecting approximately 10 percent of the U.S. population alone. FBSS is defined as persistent or recurring pain in the back or legs following one or more spine surgeries. The majority of FBSS patients receive physical rehabilitation and/or oral medications to help manage their pain, but studies and clinical experience find that many of these patients will not sufficiently improve and will require additional interventions.

Medtronic neurostimulation therapy (also known as spinal cord stimulation, or SCS) is an established treatment option for chronic back and/or leg pain that reportedly has been used to treat more than 250,000 people worldwide. It uses a medical device to deliver mild electrical impulses to the spinal cord to block pain signals from reaching the brain.

The Promise clinical study aims to enroll up to 300 people suffering from predominant chronic low back pain due to FBSS at 30 centers in the United States, Canada and Europe (Belgium, France, Germany, Spain, the Netherlands and the United Kingdom). According to the company, it is the first large-scale, randomized, controlled clinical trial designed to assess the value of SCS for predominant low back pain with leg pain using a surgical lead, in contrast to previous studies of this technology, which have focused on predominant leg pain.

“Spinal cord stimulation has become an increasingly valued treatment approach in chronic pain, and we look forward to participating in the latest study,” said Philippe Rigoard, M.D., the study’s global principal investigator, who started enrolling patients Jan. 14 at Poitiers University Hospital in Poitiers, France. “If the Promise results are positive, they will provide critically needed relief for those patients suffering from chronic low back pain associated with FBSS.”

Promise participants will be randomized 1:1 to receive treatment using either SCS with OMM or OMM only. After a six-month observational phase, the study will compare the proportion of participants in the SCS group who report more than 50 percent reduction in low back-pain intensity, as measured by the numeric pain rating scale, with those in the OMM-only group. Health care utilization data collected will be used to develop cost analysis models for potential use in future studies evaluating the long-term economic impact of SCS.

“Medtronic is committed to advancing the understanding of its neurostimulation therapy in patients with low back pain resulting from FBSS,” said Julie Foster, general manager and vice president of pain stimulation and targeted drug delivery in the Neuromodulation business of Medtronic. “PROMISE provides the opportunity to assess not only the degree of pain relief provided by SCS plus OMM compared to OMM alone in failed back surgery patients, but also to evaluate the economic and quality of life impact of this treatment by looking at such important measures as sleep, ability to work and changes in pain medication.”

Medtronic’s Neuromodulation business includes implantable neurostimulation and targeted drug delivery systems for the management of chronic pain, common movement disorders, spasticity and urologic and gastrointestinal disorders.

Zimmer Brightens Up Spine its Portfolio
Zimmer Holdings Inc. has rolled out its V2F anterior fixation system, a new implant designed for the treatment of thoracolumbar burst fractures, tumors, disc degeneration and other pathologies of the anterior spine. The system is Zimmer’s first lateral plate system for the spinal trauma segment, and was granted 510(k) clearance from the U.S. Food and Drug Administration in December last year.

The V2F system consists of a range of plates and screws designed to closely match the varying anatomy of the thoracolumbar spine. Leveraging a proprietary technology developed by Zimmer’s trauma business, the system incorporates variable-to-fixed locking cap technology, which is meant to enable surgeons to place screws at variable angles and to lock screw trajectory to the plate rigidly, or semi-constrained. This flexibility to place screws with variability of up to 15 degrees in any direction allows surgeons to avoid critical anatomical structures and better fit the existing anatomical structure, the company claims.

“Tumor and trauma pathology of the spine can result in complex anatomical challenges for surgeons,” said Steve Healy, president of Zimmer Spine business. “By incorporating novel variable-to-fixed screw and cap technology, the Zimmer V2F anterior fixation system offers surgeons greater flexibility to address the unique anatomy of every patient through variable screw and plate placement and fixation.”
The V2F also features “all-through-one” instrumentation to guide efficient screw placement; and 6 mm and 7 mm dual-lead screws to provide enhanced insertion speed and bone screw fixation.

According to Yahoo Finance, Zimmer’s spinal products revenues—which account for approximately 5 percent of total revenues—have been languishing over the last few quarters. The expansion of its spinal portfolio is an attempt by Zimmer to provide some cushion to its struggling sales.

Headquartered in Warsaw, Ind., Zimmer makes orthopedic reconstructive, spinal and trauma devices, dental implants, and related surgical products.

Stryker to Acquire China Orthopedics Manufacturer
Kalamazoo, Mich.-based Stryker Corp. is going where other large medical device companies such as Medtronic have gone before. The company now will have a division in China following a recent deal to
acquire Trauson Holdings Company Ltd. The Jiangsu-based company manufactures orthopedic products. Last year, Medtronic purchased two major medical product manufacturers in China: Orthopedic product manufacturer Kanghui and cardiovascular product manufacturer LifeTech Scientific.

Stryker’s deal is valued at $764 million, which Stryker will pay in cash, or $0.97 per share. Trauson’s controlling shareholder, Luna Group, accepted Stryker’s offer by tendering 61.7 percent of the Trauson shares toward the offer. Trauson reported $60 million in sales in 2011. According to Stryker, this makes Trauson the leading trauma manufacturer in China and a major competitor in the spine segment. Stryker and Trauson have maintained a relationship under an OEM agreement for instrumentation sets since 2007. With this acquisition, Stryker will expand its presence in a key emerging market with a product portfolio and pipeline that is targeted at the large and fast-growing value segment of the Chinese orthopedic market.

“The acquisition of Trauson is a critical step toward broadening our presence in China and developing a value segment platform for the emerging markets through a well established brand,” said Kevin A. Lobo, president and CEO of Stryker. “The acquisition of a leading player in the Chinese trauma and spine market underscores our commitment to strengthening our presence globally. With its research and development expertise, manufacturing capabilities and strength of its distribution network, Trauson is a compelling opportunity for Stryker to drive growth in China and other emerging markets for years to come.”

“The orthopedics market in China has great growth potential. The combined scale, local and global expertise, complementary product offerings and market breadth of Trauson and Stryker will create significant competitive advantages in the increasingly dynamic orthopedic industry and provide a platform to fully realize the future growth opportunities in China and globally,” said Trauson Chairman Fuqing Qian.

Stryker’s main business is orthopedics, particularly spine and neurotechnology. The company provides medical devices in a range of segments.

Ex-Orthofix Manager Sentenced for Defrauding Medicare
A former manager of Orthofix International N.V. was sentenced Jan. 10 in federal court for defrauding Medicare by falsifying patient medical records. U.S. Attorney Carmen M. Ortiz and Susan J. Waddell, special agent in charge of the U.S. Department of Health and Human Services, Office of Inspector General, Office of Investigations, made the announcement.

In March 2012, Derrick R.D. Field, 36, of Greenland, N.H., pleaded guilty to charges of healthcare fraud. U.S. District Court Judge Joseph L. Tauro sentenced him to five months home confinement as part of his two years probation. Judge Tauro also ordered Field to pay a fine of $4,000 and to forfeit $40,000.

Field admitted that for several years he falsified patient medical records, causing Medicare to pay more than $250,000 for fraudulent claims for medical devices. Between 2005 and 2011, Field was a territory manager for Lewisville, Texas-based Orthofix, a company that manufactures and distributes bone growth stimulator medical devices, among other orthopedic implants and devices. Bone growth stimulators are used to assist patients with bone fractures that do not heal properly. Medicare has specific rules regarding when it will pay for this device. When Field received bone growth stimulator orders for Medicare patients that did not meet these rules, Field forged the patients’ medical records to make it appear as though the order met the rules to induce Medicare to pay for claims that otherwise would not be covered. For instance, Field created phony medical chart notes, describing patient visits that did not occur and altered the physicians’ actual chart notes by inserting false diagnoses and descriptions of the patients’ medical history. Field forged medical records in connection with more than 100 Medicare claims, causing Medicare to pay Orthofix for orders that did not meet program guidelines.

In addition to Field’s sentence, the ongoing Orthofix investigation has resulted in a number of felony charges against executives, employees and contractors of Orthofix, including the following:

• In December 2011, Mitchell Salzman pleaded guilty to perjury while he was a regional manager;
• In April 2012, Thomas Guerrieri pleaded guilty to paying kickbacks while he was vice president;
• In May 2012, Michael McKay pleaded guilty to healthcare fraud while he was a territory manager;
• In July 2012, Michael Cobb, a physician’s assistant, was sentenced to six months in prison to be followed by two years of supervised release, six months of which must be spent under home confinement, and ordered to pay $10,000 in forfeiture. Cobb previously pleaded guilty to accepting kickbacks from Orthofix;
• In September 2012, Brian Racey pleaded guilty to healthcare fraud while he was a territory manager; and
• In December 2012, Orthofix was convicted of obstruction of a federal audit, and ordered to pay approximately $42 million in criminal fines and civil payments, and was sentenced to probation for five years.

“Healthcare fraud not only drains valuable taxpayer resources, it drives up overall health care costs and victimizes some of our nation’s most vulnerable members of society, including the elderly and disabled,” said Ortiz. “In Massachusetts, we have worked tirelessly to combat healthcare fraud and will continue to hold corporations and individuals accountable.”

The case was prosecuted by Assistant U.S. Attorneys David Schumacher and Jeremy Sternberg of Ortiz’s Health Care Fraud Unit.

Mako Surgical Funds Two Studies of its Arthroplasty Procedures
Shortly after reporting on its 2012 fourth quarter and end-of-year review, Mako Surgical Corp. has awarded Rebound Orthopedics & Neurosurgery in Portland, Wash., a $265,000 three-year grant for two research studies to be conducted at Rebound’s Salmon Creek office. Rebound is a clinic that serves the southwest Washington region, and Fort Lauderdale, Fla.-based Mako produces implants, devices and robotics for orthopedic surgery.

The first study, Clinical Outcomes of Joint Arthroplasty, will compare the outcomes of makoplasty, a robotic assisted partial knee resurfacing procedure, with traditional (non-robotic) total knee replacement surgery. The robotic assisted technique is an alternative to total knee replacement for eligible surgical candidates. According to Mako, the procedure is more precise and less invasive than a total knee replacement, and is touted for improved patient outcomes including shorter hospital stays and faster recovery. The research grant provides funding for Rebound to assess and record actual patient outcomes. According to the clinic, the study will take ten years to complete.

The purpose of the second study, Clinical and Economic Comparison of Robotic Versus Manual Knee Arthroplasty, is to document and compare the surgical and after surgery costs, recovery time, and outcomes of robotic assisted partial knee replacement and traditional total knee replacement.
Participants are asked to be involved for one year and the study will take three years to complete.
Rebound orthopedic surgeon Todd Borus, M.D., one of the principal investigators, has sub-specialty interest in arthritis and joint replacement surgery. According to Rebound, he was the first surgeon in the Northwest United States to perform robotic assisted partial knee replacements.

Donald Roberts, M.D. is the other principal investigator. Roberts is an orthopedic surgeon with expertise is disorders relating to the knee. He previously conducted other research projects on knee replacement surgical outcomes and patella resurfacing.

Overseeing the functional testing for the outcomes study will be Michael Baer, a physical therapist at the clinic. He has special interest in sports medicine and geriatric orthopedics, with expertise in rehabilitating joint replacement patients.

Finally, Rebound’s Research Director Pam Fairchild will oversee the daily management of both studies. She has worked closely as a liaison between Mako and Rebound to facilitate administering the grant money. She will enroll patients in the study, conduct testing, report on outcomes and compile test data.

Doctor Files Suit Against Smith & Nephew
San Diego Chargers team doctor David Chao, M.D., has brought a lawsuit against Smith & Nephew. He claims that the company’s training method and faulty surgical scissors for its Birmingham Hip Resurfacing implant led to a failed surgery in 2007, for which he is facing a malpractice lawsuit. Chao’s $2.2 million suit was filed in the U.S. District Court for Southern California. In 2008, a patient sued Chao for the same amount and won.

According to court documents, Chao blames Smith & Nephew for instructing him and other surgeons “to push the tips of the scissors into tissue in a manner such that the surgeon did not have a view of the tips of the scissor tines (i.e., ‘blind’ cuts).”

According to the London, United Kingdom-based orthopedic device company, the Birmingham Hip Resurfacing system has been implanted in more than 125,000 patients globally. The system was designed using knowledge gained from first generation metal-on-metal (MoM) total hips, which have proven problematic over the years (though the metal-on-metal issue is not in question in this case). The U.S. Food and Drug Administration recently issued a communication indicating that MoM hips may deposit metal wear particles into soft tissue as well as a patient’s blood stream. The Birmingham system—also a MoM implant—is described as “bone-conserving,” in that it’s not a total joint replacement.

Chao is an orthopedic surgeon and a sports medicine expert. He has practiced orthopedic surgery in San Diego, Calif., for 15 years at Oasis MSO Inc., a medical group practice. He is the head team physician for the Chargers, San Diego’s professional football team.